Software company HubSpot stunned Wall Street today as it plummeted to $467.56, marking a -4.2% change compared to the S&P 500 and the Nasdaq indices, which logged 1.0% and 1.0% respectively. HUBS is -22.49% below its average analyst target price of $603.24, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, HubSpot shares have outperformed the S&P 500 by 57.0%, with a price change of 79.0%.
HubSpot, Inc. provides a cloud-based customer relationship management (CRM) platform for businesses in the Americas, Europe, and the Asia Pacific. The company is a technology company. Valuations in the technology sector are often very high, as investors are willing to overlook gaps in the fundamentals if they believe a company’s innovations can dominate or create new markets.
HubSpot does not release its trailing 12 month P/E ratio since its earnings per share of $-4.2 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for HUBS of -111.3. Based on the company's positive earnings guidance of $6.43, the stock has a forward P/E ratio of 72.7. The average trailing Price to Earnings (P/E) ratio of US-based technology companies is 27.16 as of first quarter of 2023. In contrast, the S&P 500 average is 15.97. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead).
HUBS’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.
When we perform the calculation for HubSpot, we obtain a PEG ratio of 2.03, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.
To better understand the strength of HubSpot's business, we can analyse its operating margins, which are its revenues minues its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:
| Date Reported | Total Revenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2023-02-16 | 1,730,969 | -1,525,811 | -6 | -50.0 |
| 2022-02-14 | 1,300,658 | -1,096,600 | -4 | 33.33 |
| 2021-02-16 | 883,026 | -766,895 | -6 | 14.29 |
| 2020-02-12 | 674,860 | -591,893 | -7 | 22.22 |
| 2019-02-12 | 512,980 | -460,881 | -9 | 18.18 |
| 2018-02-13 | 375,612 | -340,019 | -11 |
- Average operating margins: -7.2%
- Average operating margins growth rate: 8.9%
- Coefficient of variability (lower numbers indicate less volatility): 34.7%
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From HubSpot's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023-02-16 | 273,174 | -47,426 | 320,600 | 19.87 |
| 2022-02-14 | 238,728 | -28,726 | 267,454 | 111.95 |
| 2021-02-16 | 88,913 | -37,274 | 126,187 | -20.81 |
| 2020-02-12 | 118,973 | -40,372 | 159,345 | 48.7 |
| 2019-02-12 | 84,851 | -22,305 | 107,156 | 53.32 |
| 2018-02-13 | 49,614 | -20,276 | 69,890 |
- Average free cash flow: $175.11 Million
- Average free cash flow growth rate: 0.0%
- Coefficient of variability (the lower the better): 276033969.9%
Free cash flows represents the amount of money that is available for reinvesting in the business, or paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, HUBS is in a position to do either -- which can encourage more investors to place their capital in the company.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts. As of the first quarter of 2023, the average P/B ratio for technology companies is 6.23. In contrast, the average P/B ratio of the S&P 500 is 2.95. HubSpot's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 21, so it's likely that equity investors are over-valuing the company's assets.
Since it has a negative P/E ratio, an elevated P/B ratio, irregular cash flows with a flat trend, HubSpot is likely overvalued at today's prices. The company has poor growth indicators because of a negative PEG ratio and consistently negative margins with a positive growth rate. We hope you enjoyed this basic overview of HUBS's fundamentals. Make sure to check the numbers for yourself, especially focusing on their trends over the last few years.
